Hawk and dove on interest rates share Minneapolis stage

Neel Kashkari, president of the Minneapolis Fed, left, and Esther George, president of the Kansas City Fed, on stage in Minneapolis Tuesday. Photo courtesy of the Economic Club of Minnesota.

One of the biggest hawks on the Federal Reserve’s rate-setting Open Market Committee stood on stage in Minneapolis and agreed with one of its biggest doves: the nation’s interest rates are just right for now.

“With the current outlook for the economy remaining positive, monetary policy settings look appropriate to me,” Esther George, president of the Federal Reserve Bank of Kansas City, told the Economic Club of Minnesota in a speech Tuesday.

George was invited to speak to the group by Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and a member of the Economic Club’s board. While they lead neighboring Fed districts, George and Kashkari approach rate decisions from opposite perspectives.

George has a record of hawkish proclivity to raise rates, while Kashkari has a dovish proclivity to keep them low. But at a time when President Donald Trump and key advisers are publicly campaigning for the Fed to lower rates, both George and Kashkari said they believe the central bank has struck the right balance at the moment.

“I think we have rates roughly at neutral,” Kashkari said Monday on CNBC. Rates are considered neutral when they are at a level that encourages hiring and keeps inflation in check.

Last week, Kashkari wrote an op-ed for the Wall Street Journal and gave interviews to the Star Tribune and others in which he argued that the country’s roaring job market, which tends to stoke inflation, is not yet strong enough to tamp down by lifting rates. The nation’s jobless rate dipped in April to its lowest level in 50 years, but Kashkari said there are still people on the sidelines. “We’ve got to let this economy continue to strengthen,” he said.

Meanwhile, in her Minneapolis speech, George talked about an issue on the other side of the rate debate: whether inflation is so low that the Fed could strengthen the economy further by cutting rates.

“The current level of inflation may perplex central bankers and financial-market participants, but in the context of a growing economy and job gains, it doesn’t demand a Fed policy response in my view,” she said.

The Fed has a publicly stated inflation target of 2%, but policymakers generally aim for a range on either side of the figure rather than the precise rate. Lately, inflation has been around 1.6% to 1.8%.

Some argue that the Fed should lower rates, giving the economy some extra juice, and then raise them again after inflation has been above 2% for awhile. But George said, “I’m not convinced that undershooting [2%] requires a deliberate overshoot.”

George has led the Kansas City Fed since 2011 and was on the rate-setting committee when it agreed on the 2% inflation target in 2012. When he joined her on stage Tuesday, Kashkari, who has led the Minneapolis Fed since 2016, asked George whether she thought the committee would have made different choices on interest rates over the past few years if it had formally established the range instead of the precise target.

George said she didn’t think so, but she added that the precision of the target has complicated the Fed’s communications to the public and investors about interest rates.

They got no closer than that to discussing their differing approaches on rate policy.

George did tell the audience she worries that the Fed doesn’t have much room to cut rates — the federal funds rate now ranges from 2.25% to 2.5% — the next time there’s a U.S. recession. Kashkari told interviewers earlier this year that he’s not worried about that and noted the Fed has other tools to combat an economic downturn when it comes.